Increasing the profitability of clients, the impact of technologies and attracting and retaining talent are the top three challenges for traditional capital market players as is shown by PwC. The firm’s report on the capital market also shows that external changes are set to create a new equilibrium in the global capital market. Besides the risk of a large scale cyber-attack, the entry of FinTech and other shadow banking industry players is set to change the wider landscape, while traditional players continue to be saddled with ever increasing regulatory conditions.

In the second in a series of reports, titled ‘Capital Markets 2020: Will it change for good?’, into the banking and capital markets, PwC considers the future of capital markets to 2020. Finding that with the development of new technology, the imposition of tough regulator frameworks and the rapid expansion of new entrants to the capital market landscape, a new equilibrium will form between now and 2020. To discover how the industry sees itself placed within the coming five years, the consulting firm surveyed 261 executives from within the industry.

Internal challenges to 2020In developing the trends affecting the future of the capital market industry, the survey captures the situation faced by industry executives over the coming five years and asked the executives to cite their top three challenges to 2020. The number one challenge, named by 36% of respondents, is increasing profitability for clients, followed by the impact of new technologies at 33% and attracting and retaining talented employees at 33%. Less concerning overall to respondents is attracting new clients at 18%, demands from shareholders at 6% or macroeconomic factors at 4%.

External risks to 2020As part of its analysis of the situation, the consultancy considers a number of future scenarios that may come to affect the industry from the perspective of the respondents. The number one scenario involves a crippling global cyber-attack that comes to affect the industry as a whole. The attack would force governments to focus even more on combating cybercrime, however, the worry is that the damage will already be done to the global trust in the financial system, leading to fragmentation of the system, bringing with it harmful consequences to financial markets.

The second most cited scenario is the over-regulation of traditional financial markets, which sees it made more difficult to make returns on equity. Further issue from over-regulations is an increased engagement by entities with poor risk profiles of the shadow banking system. With structural competition within the shadow banking industry, and its unregulated format, a new debt bubble may build that pops with potentially costly government intervention.

The third biggest risk comes from the rise of financial technology (FinTech) companies that provide both trusted and convenient products for consumers, with the majority of technology and operational infrastructure operated by FinTech. While it will bring with it benefits such as convenience and lower prices, it too comes with management and regulatory challenges. Further challenges may come from the shadow banking industry, with players such as crowd funders and peer-to-peer lenders, which are largely being deployed through advances in digital channels. Of the respondents, 70% indicate shadow banking to represent a moderate to severe threat to traditional banking, with 16% believing shadow banking will expand beyond its 25% market share of financial assets.

A further possibility, at number four on the list, is a large macro and idiosyncratic event that hurts global economies that could cause failure of a SIFI or FMU, prompting a re-evaluation of systemic risk concentration as well as measures to manage these risks. The fifth risk comes from the risk of key central banks using inflation as a tool to lower sovereign debt, which could spiral out of control into hyperinflation, with the hyperinflation wreaking havoc on capital markets.

Commenting on the results, Crispian Lord, a UK Financial Services Regulation Partner at PwC, says: “The industry is prioritising responding to the aftermath of the financial crisis, but for some participants this will be limited to chasing compliance with the next regulation. The winners will be those that meet new client demands, adapt to technological advances and capture the opportunities arising from the industry reform agenda. Otherwise, participants such as investment banks, broker-dealers and financial market utilities and users such as private equity firms, pension funds, hedge funds and other non-bank financial intermediaries and corporates, run the risk of emerging from the crisis recapitalised, restructured, reformed but irrelevant.”